Sunday, August 17, 2014

Calculate Your Financial Freedom Number

I hope you’ve enjoyed the blog posts up to this point on how the wealthy think and what they do.

Let’s talk about the big picture and how to calculate the level of assets that will generate an income so you can choose work if you want to do that, or choose to do something else, or nothing else. However, I’ve not met anyone in my career where doing nothing was a goal. No one has said to me, “When I stop working I’m going to sit my sofa and watch daytime TV with a beer in one hand and the remote in the other.”

Instead I’ve heard things like;
·         I’m going to travel the world
·         I want to volunteer at Massive Hospital Group
·         I’m going to take my grandchildren hiking along the Oregon Tail
·         I’m going to take up oil painting, fishing, hunting, and distance biking
·         I’m going play golf on one course in every country on the globe at least once
·         Inside me is the great American novel, and I’m going to write it
·         That 40 foot boat in my back yard will be done and I’m going to sail the world…

You may be asking, “What’s the simplest way to calculate what I would need to stop working?” You’ll find this information in the ebook version of the revised Wealth On Any Income that I sent out. If you didn’t receive it, please let me know.

Here’s a quick review: To do the calculation you’ll need to look at your balance sheet. The first step is to subtract the value of personal use assets, like your home and autos, from your net worth. That should leave you with your investable assets, like cash and retirement plans, rental real estate, and so on. Let’s say that total is $800,000. Since we cannot predict how long you will live, we will NOT figure that you’ll spend any capital and end up on your last day spending your last dollar.

The next step will be to determine a rate of return you can earn over the long term on your $800,000 of investable assets. If you have real estate investments, calculate what you are currently earning on the equity after expenses. If it’s in Los Angeles, it may be as little as 2 -3%, or it could be 8-10% in other parts of the country. Regardless it could be converted into another asset, like a Delaware Statutory Trust (DST) investment, and provide an 8-10% cash flow with no management responsibilities.

If you see your investments returning about 6% per year, or you feel that’s a reasonable and safe amount to use, then multiply $800,000 x 6%. This would be $48,000 per year of income. Some of this would be taxable, some might be sheltered. Would a gross income of $48,000 per year maintain your standard of living? If you earned 8% on your assets the return would be $64,000. Would this be enough?

From this you can see you either have enough income, or you need to create more investable assets, or earn a higher return and possibly expose your assets to a higher level of risk.

When you’ve accumulated enough assets that can earn the return you are comfortable with, you will have the income to support your standard of living. At that point you will have achieved financial freedom. Whether you worked for a living or not, you would have the income you need to support your lifestyle.

I look forward to your comments. Was I clear about the steps to take? Is there anything I left out that you want to know?

For a free copy of my best selling, award winning book, Wealth On Any Income, log onto , enter your name and email address and press the button that says “Click here for your free book.”

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